A recent Internal Revenue Service decision to reject a healthcare association's tax-exempt status may signal a hard-line approach when it comes to ancillary hospital-physician joint ventures, according to a former IRS official.
The healthcare association that was denied tax-exempt status by the IRS has appealed the decision to the U.S. Tax Court in Washington.
The petition by the John Gabriel Ryan Association, an ancillary services organization sponsored by not-for-profit, 18-hospital Providence Health System, Seattle, appeared on the court's online docket last week.
The association's only activity is ownership and operation of five ancillary joint ventures-medical office buildings and imaging centers-between Providence hospitals and affiliated physicians in Alaska, California, Oregon and Washington. In two of the joint ventures the association is a partner with for-profit organizations. Four of the ventures are fully controlled by not-for-profits, while the fifth is controlled equally by for-profit and not-for-profit interests.
The association is named after the late Sister John Gabriel Ryan, a Roman Catholic nun with the Sisters of Providence order.
The association was established in 1985, reorganized a decade later, and applied for tax-exempt status in 1998. In its request for a judgment declaring it a charitable organization, the association argues that all the joint ventures contribute to Providence's charitable mission and in the case of the fifth, a binding guarantee ensures that the charitable mission is served.
In an Oct. 15 letter, the IRS advised the association that it isn't eligible for tax-exempt status because its activities benefit private interests significantly and as a result it owes back income taxes from 1997 to the present.
Healthcare tax attorney Marcus Owens, a former IRS official now with Caplan & Drysdale, Washington, said the IRS rejection seems to indicate "little room for flexibility" in the treatment of ancillary joint ventures. "It seems like there are sufficient facts and circumstances to support a favorable conclusion here, not an adverse ruling," said Owens, who is not involved in the case.
He said the IRS may have taken the position it did to buttress its recent appeal of a summary judgment favoring St. David's Health Care System, Austin, Texas, in a tax-status case also involving joint ventures (Sept. 9, p. 6). The IRS appeal in that case challenged a U.S. District Court judge's order that it reinstate the tax-exempt status of St. David's and return to the system $1.2 million in taxes plus interest.
The John Gabriel Ryan Association's healthcare tax attorney, T.J. Sullivan, of the Washington office of Gardner, Carton & Douglas, described the amount the IRS has requested as "more than substantial."
The association is asking the court to declare it as a charitable, tax-exempt organization and order the IRS to grant its application for exemption, said Sullivan, also a former IRS official.
A single judge within the U.S. Tax Court will hear the case, probably within a year, sources said.